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Downturn may boost network sharing

At a recent conference, someone suggested that network sharing is a bit like healthy eating in the UK: Everyone talks about it obsessively and watches endless TV shows about the subject, but nobody actually does anything about it.

When you consider that network sharing has been around for a couple of years, there are still surprisingly few examples of successful deals worldwide, with a few in Australia, Spain and Sweden. Most others are still at too early a stage to fully assess, and some have clearly struggled.

But network-sharing efforts might be about to receive a shot in the arm, in the form of an extended economic downturn. A number of factors that could boost take-up are slotting into place. In a stable environment, it’s difficult to drive through profound organizational changes, but when the stakes are raised, the loss of a RAN empire might suddenly seem the least bad choice, especially with operators already feeling cost pressure because of the decoupling of costs and revenues.

Since network costs account for up to a quarter of operators’ total opex and the bulk of capex, network sharing holds the promise of providing considerable savings. According to Mark Neild, a managing consultant at PA Consulting, two operators jointly deploying infrastructure can save 30-50% in opex and a similar figure for capex.

The extent of the savings depends on a broad range of factors, and the sharing model being adopted will have a big impact. According to Brian Potterill, a director at Price Waterhouse Coopers, simple site and tower sharing can save each operator Eur9,000 (US$11,500) in capex and ?3,000 in annual opex per site, whereas RAN sharing can save them Eur65,000 in capex and Eur7,000 in annual opex. The sharing of other active-network elements, such as transmission equipment, can also generate considerable savings.

In the current economic environment, these are potentially large sums to be weighed against the more nebulous role of the network as a strategic asset and competitive differentiator.

In developed markets, it is the rollout of 3G networks into rural areas that initially brought network sharing onto the agenda, but other expensive technology investments – such as femtocells and LTE – are around the corner, and mobile backhaul investments are ongoing. It won’t be easy for operators to address these on their own, especially if markets are still in recession or only just recovering in 2010.

But potential savings don’t apply just to future technologies. Some mobile operators are thinking about hanging onto GSM networks to support legacy services in parallel with LTE. Because much of the current GSM equipment is reaching the end of its life, sharing the cost of upgrading a legacy network will be an attractive option. After all, it is difficult to argue that a 2G network is a competitive differentiator.

The savings that can be made in network sharing are inversely proportional to the complexity of a situation – higher in a joint greenfield rollout and lower in the case of consolidation of existing networks – but if savings need to be found, operators will turn to any means at their disposal.

One problem with network sharing is that initial restructuring costs can be high – as much as two or three times annual opex savings – so having tight cash flow might initially discourage this type of investment. But in an extended downturn, accountants might change their view. From a timing point of view, the T-Mobile/3 network-sharing initiative in the UK might prove to be a touchstone. It’s still too early to tell, but if there is a positive progress report from the companies next year – as seems likely – it could be just the incentive other operators require.

It’s worth adding that although opex and capex savings are potentially significant, there are broader incentives for network sharing. The downturn will drive mobile operators to look at both capital savings and the availability of capital for new investments.

The prospect of improved valuations could be another reason for adopting network-sharing strategies, according to Julian Plumstead, a director at investment bank NM Rothschild and a speaker at the recent IIR Network Sharing Strategy Forum, who says network assets are frequently valued higher in isolation than as part of an operator. Wireless-infrastructure companies typically have higher valuations relative to EBITDA than mobile operators. This presents an opportunity for operators to spin off their networks and raise equity through a minority sale to a strategic partner, to spin off a portion of stock held by the mobile network operator or even to sell a controlling stake in the whole business.

Possible candidates could include mainstream vendors and tower operators, though third-party investment might now be in short supply. It will be a brave – or desperate – operator that spins off its network into an independent company in the current economic environment. More-traditional network-sharing arrangements between operators are far more likely.

2 comments

I worked on two network sharing projects – as chief architect for the core 3G network sharing project in Sweden – successful – and leading the technical aspects for the procurement of a proposed shared 3G RAN project in the Netherlands – which failed.

The key challenge is to overcome the loss of control by the operators over their roll-out plans and independence.

In the case of Sweden the benefits outweighed the losses – the requirement to cover 99.98% of the population in the second largest country in Europe by land area provdied the incentive. In the Netherlands the imperatives were less and eventually the policy differences between the two operators led to a breakdown – the benefits weren’t strong enough to hold it together.

Lesson: Network Sharing is only going to succeed when the two parties egos are overwhelmingly outweighed by the financial gain. If the benefit is only marginal the relationship will likely explode…

Richards comments are clearly borne out by what is happening in the UK. T-Mobile and “3” have decided to merge their networks under the MBNL banner and all is moving forward relatively smoothly as the two companies recognise the absolute benefits of working in this manner for a more productive and beneficial future.
However, Orange and Vodafone’s planned joint network suffered as a result of their egos with them still not fully deciding how best to work together. The problem is their networks and technology capabilities are too similar and the benefits are not as clear as those for T-Mobile and “3”. At present all they can agree to do, it seems is to share physical structures but not merge the actual networks – which at best will make their networks match as far as coverage goes but still means that they will each have to fork out for seperate R&D each time the technology evolves…something that they are likely to pass on to their consumers.

Question: What will the future hold for Vodafone and Orange in this instance? How will they be able to compete on a level playing field with MBNL once hte technology evolves beyond what they are expecting?

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